In June, 2013 it was announced that Sobeys' parent company, Empire Company Limited, had reached a deal to buy 213 Safeway grocery stores in Western Canada for $5.8 billion. As part of this deal, Sobey's will obtain four (4) primary distribution centers, a related wholesale business and 12 manufacturing facilities. Sobey's already has some distribution infrastructure in Western Canada so we took it upon ourselves to understand this situation further. It goes without saying that anytime there is an acquisition of this magnitude where there is an overlap of facilities within the same market areas, it is realistic to expect distribution infrastructure consolidation to take place to obtain efficiencies.

In general, grocery distribution efficiency increases as throughput volume increases as long as the capacity of a building is not exceeded. When throughput and/or storage capacity is exceeded, then there can be a sharp decline in warehouse productivity which ends up yielding a higher cost per case for distribution services due to additional overtime and manpower requirements.

In the discussion below we describe the distribution infrastructure in Western Canada for both firms and then we discuss synergies for consolidation. It is important to note that the information discussed below has been obtained from public records. Neither Safeway nor Sobeys have had any involvement with this developing this article. Further, the thoughts expressed within this article are strictly the opinions of the author who has formulated these opinions based on his experience in the field of supply chain strategy.

Safeway Western Canada Distribution Infrastructure

The most recent information (May, 2013) that we have is that Safeway Canada operates from four (4) main distribution centers totaling 2.08 Million square feet in Canada:

In Winnipeg, Safeway operates from two distribution centers:

A 427,000 square foot facility in the west end of Winnipeg on King Edward Street that ships Dry Grocery, Tobacco, Supplies, Perishables and Produce to corporate and independent stores in MB, SK and ON. This is an older building that Safeway set up in 1962. The facility is on a site that has limited expansion capability.

A 35,000 square foot freezer facility on Empress Street in the West end of Winnipeg. This facility distributes Frozen Food and Frozen Meat.

GM/HBC/Tobacco/Repack are distributed from a 111,000 square foot (estimate) facility on 48th St. S.E. in the southeast part of the city.

In Edmonton, Safeway operates distribution from two locations:

A 442,000 square foot facility in Edmonton on Yellowhead Trail at the junction of the St. Albert Trail on the northwest side of town. This facility distributes Grocery, Perishables, and Produce to corporate and independent customers in BC, SK and AB. This facility has limited expansion capability.

Frozen Food is distributed care of Trenton Cold Storage from a 210,000 square foot facility on 66th St. NW

In Vancouver, Safeway operates from three distribution locations, all of which are operated by third party logistics companies:

The most recent information that we have is that Sobeys operates from five (5) distribution centers across Western Canada totaling 1.29 Million square feet:

A 321,000 square foot Sobeys West IGA full-line Distribution center on Inkster Blvd in Winnipeg on the northwest side of the city just a few kilometers away from the Safeway building. This is a 30 year old building that was recently expanded from 200,000 sq. ft. in order to supply Target stores with food merchandise. Further facility expansion does not appear to be an option.

A 208,000 square foot Calgary Grocery/Perishables distribution center on 30th Street SE which was last renovated in 2012.

A 152,000 square foot Thrifty Foods refrigerated distribution center in Victoria, BC near the airport near Mills Road that was opened in 2011. This facility services corporate and independent stores on Vancouver Island and the lower mainland.

A 93,100 square foot Thrifty Foods dry distribution center / office complex in Central Saanich, BC which is on the north side of Victoria, BC.

The Overlap in Distribution Infrastructure

From our perspective, the most obvious overlap in distribution infrastructure exists in the cities of Winnipeg, Calgary and Edmonton. These are our predictions:

In Winnipeg, the two main distribution centers are older full-line facilities. The consolidation of these two buildings will not yield significant transportation savings thus the business case for consolidation will be predicated on savings made available by reducing fixed overhead expense and through warehouse labor efficiency improvements. In our opinion, there is insufficient volume to justify an automated distribution center similar to the Sobey's Vaughan facility. Any type of consolidation here would most likely require a new site and building since both of the existing sites appear to be land-locked. The Safeway freezer is a smaller facility and there may be an opportunity to consolidate this facility. The investment cost is high relative to the returns so consolidation is not a slam dunk decision for this market - don't bet on it. (editor’s note: In March, 2015 Sobey’s announced that it plans on closing the Safeway distribution center on King Edward Street in 2016 when the facility lease expires)

In Calgary, the situation is different from Winnipeg since this is a high growth market. Here it likely makes economic sense to consolidate perishables distribution into the newly expanded Safeway distribution center since the Sobey's facility is smaller and more limited. Similarly, the Sobeys Dry Grocery distribution operation is a good candidate for consolidation into the Safeway infrastructure.

In Edmonton, the total warehouse space being operated between the two firms is over 950,000 square feet which is significant. The Sobey's distribution center is positioned on a larger plot of land which appears to have room for expansion. If consolidation is economically justified then we would expect the Sobey's location to be the more logical choice. It may also be feasible to take the outsourced frozen food distribution operation in-house as another opportunity.

Now keep in mind that distribution infrastructure consolidation and expansion decisions require extensive analysis since they are not taken lightly. Often times, the one-time expenses and business disruption associated with a consolidation opportunity can be very costly and these factors alone can be show-stoppers. Without the ability to capture real outbound transportation savings, the business case for facility consolidation is always more challenging. Since this is the case in the three locations we discuss, it will be interesting to see if we have read the tea leaves correctly.

Lastly, it will be interesting to see if Sobey's decided to invest into another automated distribution center given the higher throughput volumes made available through this acquisition. Sobey's is a smart company that is willing to take risks. It would not surprise me to hear that Calgary or Edmonton will be the next site for an automated Sobey's full case dry grocery distribution center.

As always, these comments reflect the unbiased opinions of the author and are not based on any inside information to speak of.